Tax Cut May Transform Housing Market
The new federal budget plan could bring a financial windfall to thousands of California homeowners, boost the number of high-end homes on the market and alter long-time home-buying patterns across the state.
The proposal, which allows many home sales to be made tax-free, is expected to have a more dramatic effect in Southern California than other regions because of the large number of expensive homes here.
“It’s going to spur a tremendous amount of [sales] activity,” said Sally Frey, an agent with ERA First Star Realty in San Juan Capistrano. “Inventory has really dried up since the first of the year. This will give us properties to sell again.”
The spending bill--which must still win final approval and is subject to change--could lead to an immediate boost in the number of “For Sale” signs in pricey neighborhoods, such as Newport Beach and Santa Monica. In the long run, the changes in the tax law could change home-buying patterns. For example, people who sell their homes will no longer be forced to buy new houses that cost at least as much as their old homes, to avoid paying higher taxes.
“For people who want to trade down [to a smaller house] or want to rent for a while or want to move from California to Iowa . . . those people would be thrilled” under the new tax law, said West Los Angeles tax expert Phil Holthouse.
Under the new tax plan, a homeowner could avoid paying federal taxes on up to $250,000 in profits on the sale of a house. A married couple could shelter up to $500,000 in profits from taxes. The new tax plan, which allows homeowners to claim these exemptions every two years, would apply to any home sales after May 7 of this year. Currently, only homeowners over age 55 get a clean tax break on the sale of their homes: a one-time-only exemption of $125,000.
This is good news for a lot of so-called “empty nesters,” older divorcees or couples who live alone, after years of raising a family, said broker Frank Hill with Century 21 Rainbow Realty in Laguna Hills.
“They can sell, take the capital gain and use it for cash to live on,” he said.
Holthouse and real estate experts say most of the financial benefits from the proposed changes will flow to a relatively small number of homeowners, primarily older people who have seen their property values balloon over the decades. Many people who bought their homes in the 1950s and 1960s in now-sought-after neighborhoods are likely sitting on a quarter-million dollars or more in equity, economists say.
For example, in 1964, Gloria and Ray Mathys were one of the first residents to move onto their misty cul-de-sac of traditional-style homes above the ocean in Rancho Palos Verdes. The houses sold in the mid-$40,000s--a respectable but not steep price at the time. Now they command sums in the $500,000 range.
The proposed capital gains tax cut “would be a boon for a lot of us” on the quiet street, said Mathys, who described her four-bedroom home as a “great party house.”
“I’m all for it,” she said, adding that they have no immediate plans to sell.
Their neighbors, Ann and Chuck Ivons, also plan to stay put but allowed that such a tax cut “would be wonderful,” Ann Ivons said.
“It’s not everybody’s nest egg, but it sure is a lot of money,” she said. “But we plan to stick around. We’re either not grabby, or we’re dumb,” she said with a laugh.
Despite a plunge in California home values during the recessionary 1990s, prices still remain way above most parts of the nation. In June, for example, the median sales price of a California home was about $189,000--more than $60,000 higher than the national median. As a result, the tax break is likely to mean more to Californians.
Many agents are expecting a surge of new home listings as people who had been waiting for more details on the plan, which was first unveiled earlier this year, decide to sell.
“I’ve had a lot of clients who have said they are waiting to see what happens,” said Nancy Amorteguy, manager of the Prudential Jon Douglas office in Ventura.
The prospect of more homes hitting the market would normally worry real estate brokers concerned about falling prices. However, with sales up strongly in many neighborhoods across Southern California, agents say the additional homes would not sit on the market for long and depress prices.
“We have enough buyers to accommodate them because interest rates are so low,” said Marty Rodriguez, a Century 21 real estate broker in Glendora. “It will bring houses on the market that buyers are waiting for.”
Bob Kulick, president of the California Assn. of Realtors, said the state’s real estate market will also benefit from other provisions in the new tax bill, which would lower the maximum capital gains tax rate to 20% from 28%. The lower rate could encourage more people to sell securities and invest them in a new or larger house, he said.
“It will be good for the entire market,” said Kulick.
But other brokers and economists say they expect the tax bill to have minimal impact on the overall real estate market.
Broker Hill in Laguna Hills said he doesn’t think a lot of houses will suddenly be dumped on the market.
“I think it will have more of a [slow] ripple effect,” he said, noting that many homeowners will still have to decide where they want to move.
Esmail Adibi, director of the Center for Economic Research at Chapman University in Orange, also sees little reason to expect much change.
“I don’t think you are going to see a big influx of elderly sellers--I think some people are over-exaggerating,” he said.
The market, he said, would have really been shaken up if sellers would have been allowed to deduct the entire loss on their sale. That would have benefited the thousands of Southern Californians who have kept their homes off the market because of depressed property values.
“You have a big chunk of people who are sitting on big losses,” said Adibi.
Ironically, the tax bill might hurt a small number of luxury homeowners. In particular, sellers of high-end homes with gains exceeding $500,000 would be hurt because they no longer would be able to roll the profits, tax-free, into their next home, said Jeff Hyland, president of Hilton & Hyland, a Beverly Hills real estate brokerage.
Hyland said he just sold a home in Bel Air for $4 million because the owner was afraid that the tax proposal would eliminate his ability to continue rolling profits from past sales into future homes. Homeowners can still take advantage of the old rules if they agree to sell their old house and purchase a new one before the tax bill is signed into law.
“His tax lawyer said, ‘You’ve got to sell before it’s too late,’ ” Hyland said. “This will be awful for people on the Westside who bought houses for $300,000 and they’re now worth $2 million.”
Times staff writer Nancy Rivera Brooks contributed to this story.
